Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

According to the UN and OECD, what characterizes harmful or preferential tax regimes?

1. High tax rates that encourage investment

2. No or low tax rates that attract real business

3. Complex tax regulations that benefit large corporations

4. Tax regimes that provide full transparency on transactions

The correct answer is: No or low tax rates that attract real business

The characterization of harmful or preferential tax regimes often focuses on the notion that these regimes typically feature no or low tax rates designed to attract businesses looking for favorable tax treatment. Such structures can lead to tax competition among jurisdictions, encouraging multinationals to relocate profits to low-tax areas, thereby eroding the tax base of higher-tax jurisdictions. This strategic use of low tax rates is particularly attractive to entities seeking to minimize their overall tax liabilities, which can create an imbalance in global taxation and lead to wider economic implications. The focus on attracting real business, while operating under minimal fiscal responsibilities, illustrates how these regimes might compromise effective tax collection. The other options imply criteria that do not fully align with the standard definitions of harmful tax regimes. For instance, high tax rates are generally not seen as attractive and tend to deter investment rather than encourage it. Complex tax regulations may benefit large corporations, but they aren't necessarily viewed as preferential in the same way low-tax regimes are. Furthermore, regimes that guarantee full transparency on transactions would typically not be classified as harmful, since transparency is often regarded as a positive attribute in regulatory practices.